Smart Procurement Solutions

It was sometime early in 2002, and SM Trehan was a worried man. The managing
director of Crompton Greaves was virtually presiding over the last rites of this
63 year old engineering conglomerate-a company he has been associated with
since his management trainee days. Total losses in excess of Rs 220 crore in
2001-02 had led to a 50% erosion of the net worth of the company; both vendors
and lenders had given up all hopes; the Thapar Group company was not just sick,
it was dead by all accounts.

What, however, transpired in the next two years is nothing short of a
miracle. In a remarkable turnaround scripted by some smart strategic decisions,
Crompton Greaves staged a financial comeback-the Rs 220 crore loss was
followed by profit margins of Rs 7 crore, Rs 37 crore, and Rs 90 crore
respectively. CFO, BR Jaju, regarded as one of the chief architects behind this
turnaround, attributes the success to a host of measures like ruthless cost
reduction, relocation of plants from Mumbai to Goa and Ahmednagar, as well as
divestment of other NPAs, and using that liquidity to reduce borrowings. Another
important contributor to this recovery was the Ariba spend management solution;
it helped Crompton Greaves to plan its purchase process differently, with
remarkable results. Traditional modes of procurement was leading to high
material cost of 73%; e-sourcing has brought it down to 69%.

Analyzing 'spend management'

The Crompton Greaves experience would indicate that a spend management
solution could be a panacea for many of the ills plaguing the procurement
process of large enterprises. While Jaju agrees that there is much truth behind
such an assumption, it would really be naive to expect spend management to
rectify all procurement woes, unless there is absolute co-operation from the
internal team responsible for the purchasing process. "In most cases, they
feel that automating the purchase process by means of spend management would be
treading on their turfs and that, in turn, would reduce their significance in
the organization," believes Arun Kharbanda, director, Ariba India.
Therefore, he believes, it is imperative for all CXOs, not only the purchasing
department people but even the CFO and the CIO, to properly understand the
components of a spend management solution and the scope it offers.

Primarily, any spend management solution rests on the three pillars:
visibility, sourcing, and procurement. While visibility takes care of issues
like what is being purchased, from whom, and at what price, sourcing takes care
of issues like getting better pricing for materials purchased. Finally,
procurement helps in the entire actual purchasing process and the payment part
involved in it. To explain in a more lucid manner, the visibility part throws up
spending data for organizations when procuring materials, data that otherwise is
not easily available. This part of the spend management solution sits on top of
the ERP and gathers data about different existing vendors supplying at different
prices; sanitizes this data and performs an analysis to weed out discrepancies
like multiple purchases from the same supplier at different rates.

This process is taken further in the sourcing phase when it checks out
whether better suppliers are available at more competitive prices. This further
improves the efficiency of the buying process and helps reduce the costing and
the purchasing life cycle by 70-80%. The biggest benefit offered by the
procurement process is in improving transparency-a tremendous advantage for
enterprises since purchasing often involves cartelization and subsequent
increase in costs. "Apart from cost reductions, this process has enabled us
to identify new suppliers, introduce best practices, and bring about greater
transparency in our dealings with suppliers," admits OP Lohia, MD, Indo
Rama Synthetics. Spend management has found another advocate in Jude Magima, VP,
Central Purchase and Procurement Planning for Dabur India. "Spend
management has streamlined our purchasing process. Earlier, it was very
haphazard as we would arbitrarily decide to buy small quantities from many
suppliers. But this new sourcing process has brought transparency and efficiency
to the system."

E-sourcing advantages

Procurement's success at identifying and realizing savings has helped it
gain influence and trust within companies. "Once managers saw procurement
as a back-office assignment, but it has now catapulted its way to the vanguard
of the organization," reveals Manish Gupta, CEO of Pune-based Synise
Technologies, a Bharat Forge company, that runs Supplier Relationship Management
(SRM) consulting, services and solutions on the Indiaengineering platform. In
addition to generating savings, Kharbanda feels that three larger trends turned
the corporate eye towards procurement in the last few years. The first, Internet
connectivity, which provided companies with a new medium to identify, negotiate
and engage suppliers and partners on an ongoing basis. Second, the introduction
of new tools and technologies, which empowered organizations with visibility and
transparency into specific business issues, for the first time (eg tools to gain
visibility into spending habits and to address maverick purchases). And third,
the rapid introduction of global markets as sources of supply, manufacture,
services and demand continued to elevate executive interest in procurement.
Taken together, these trends helped executives to think not only about the
opportunity to reduce costs, but how to create new forms of value inside and
outside the organization through more responsive supplier relationships, faster
organizational decision making, and more efficient processes.

No wonder then that e-sourcing has dramatically altered things at Carrier.
"It has expanded our supplier outreach globally; increased competitiveness
among our suppliers; and led to negotiations that are held on a level playing
field environment," informs Ashish Kaul, GM, Supply Chain, Carrier Aircon
India. Jaju adds that there was resistance from not only the suppliers, but also
from many of the purchasers at Crompton Greaves itself. "Lot of internal
training was done before these people agreed on this new mode of
procurement." Adds GP Bhatia, Sr VP, Materials, Indo Rama, "The online
sourcing process really works and is an effective mechanism to obtain market
prices and deliver tangible savings to the bottomline."

The Crown Jewels of Indian e-sourcing... Global leader in branded foods, Heinz India started on e-sourcing in India in August 2001. Heinz India expected results quickly and had no time for trial-and-error discovery of e-sourcing best practices. It began sourcing key raw materials like sugar and Dextrose Monohydrate at substantial savings over previous contracts, often seeing better prices even from incumbent suppliers. The success level of initial negotiations led the company to expand the program to the procurement of diverse services, including packaging and shipping or transportation. In the first phase itself, Heinz sourced nearly $10 mn of materials and held over 22 online markets with identified average savings of 13%. Increased supply base visibility has been another benefit of the company's online sourcing program. Drawing on Ariba's database of over 100,000 suppliers worldwide and using Ariba's global presence to advance new supplier research and qualification, Heinz India has now a much better perspective on the supplier landscape, and can make more informed choices in terms of which suppliers are most appropriate for specific RFQs. Indo Rama Synthetics initiated a year-long pilot on spend management in 2001 to assist them in their sourcing efforts. During the pilot program, Indo Rama used FullSource across a whole host of commodities ranging from packaging material, transportation, fuel oils, MRO, and project purchases. Indo Rama became the first textile/polyester company in India to source about Rs 150 crore across 280 line items through 70 online markets. This drew significant participation from over 150 suppliers. The process enabled Indo Rama to rationalize their supply base and bring about transparency in their interaction with suppliers. The range of commodities sourced include different types of packaging materials like cartons, paper tubes, paper cones, fluted plates, plastic adapters, liquid cargo freight, MRO items like DG oils, anti-static oils, filter candles, and project purchases such as spinerettes, utility pumps and polymer valves. Indo Rama is now embarking on a plan to internalize online sourcing and also initiating pilot programs at its Indonesia and Thailand operations. Dabur started online sourcing in December 2002 and has since then adopted both FullSource and QuickSource solutions from Ariba. Its first sourcing project was to procure saffron from Kashmir, not an ideal place for a technology-driven process. Though there was not a great change in the prices, this was the first step in streamlining the purchasing process. In 2003-04, Dabur procured Rs 210 crore worth of raw materials through e-sourcing, nearly half of its total raw materials spend. This brought in greater transparency and substantial savings, and the effort was recognized by the Indian Institute of Materials Management, which awarded the Chief Procurement Officer Award for 2003 to Dabur's VP-Supply Management. In 2004-05, Dabur implemented Ariba's Spend Visibility solution as it used e-sourcing to procure items like herbs, honey, spices and packaging. Other than bringing transparency, e-sourcing even aggregated a scattered and fragmented market like herbs into a competitive and manageable sphere. Tata Engineering has been awarded the India e-Sourcing Pioneer Award for its contributions to e-sourcing leadership in India. It started with a pilot program in 2001 to test negotiations for diverse items like tyres, bearings, leaf springs, fasteners, dies, oils, steel and castings. Over the past few years, Tata Engineering has sourced over $250 mn of goods and services, ranging from critical engine items like cylinder liners to EPDM hoses. Tata Engineering has already run over 200 online markets and achieved savings in excess of Rs 100 crore. In one market, for metal stampings only, the company generated a total of 593 bids and the winning bid represented savings of 19.2% over preceding contracts for the same items. For Crompton Greaves, e-sourcing was one mode of its survival strategy. Now its high material costs have come down from 73% to 69%, thanks to spend management. Till date it has sourced materials worth Rs 128 crore in five areas of packaging, lamination, bearings, paints, and metal products. While online sourcing has resulted in success for bearings and packaging, results from lamination and metals have been disappointing. This has been primarily because of price fluctuations of copper, though e-sourcing has increased Crompton's exposure to markets in Sri Lanka, China, and Nepal. Total savings have been pegged at around Rs 15 crore till date, through spend management, and consequently, Crompton is looking at online sourcing in other areas like transportation, hotel bookings, and computer maintenance. E-sourcing has dramatically altered procurement at Carrier Aircon, the India operations of Carrier. They have expanded their supplier outreach globally, increased competitiveness among suppliers, and led to negotiations that are held on a level playing field environment. Carrier has conducted online markets for four broad supply categories-ocean freight, capacitors, thermostats, and lube oil. Each time they saved between 13% and 18%. The first product that Carrier put up for bid was powder paints. Today, it intends to purchase nearly 505 of its annual spend through e-sourcing solutions.

What's there in the market?

Regarded across the industry as the father of Supplier Relationship
Management, Ariba today has more than 20 active clients in India. This includes
large companies like Dabur, Reliance Energy, Crompton Greaves, Tata Motors, TVS
Motors, Heinz India, Carrier Aircon India, and Indo Rama Synthetics amongst
others. Till date, it has helped in sourcing materials worth more than Rs 10,000
crore, and has achieved savings of up to Rs 1400 crore. Two significant events
happened in the last few months-Ariba forayed into the government domain with
Bharat Earth Movers (though it has done a small project with Bharat Petroleum
earlier); and it broke the myth that only manufacturing organizations are
interested in spend management, when it bagged ICICI Prudential as a client from
the services side. Adds Kharbanda, "In some cases even the suppliers
themselves have become our clients after realizing the benefits of e-sourcing;
SKF is one such example."

Boasting of over 75 corporate customers including the likes of Cummins,
Thermax, Tata Chemicals, Electrolux, Whirlpool, and Tata Steel, Synise has
enabled over Rs 800 crore of procurement and disposals contracts on
Indiaengineering, and has a total user base of over 8,000 unique users. The
company has also implemented its software solution at over eight locations in
diverse areas such as Project RFQ, eBidding, Request for Information solution,
and Supply Management solution. These include companies like Tata Chemicals,
Sunflex, ABB, Sterlite, Mahindra & Mahindra, Automotive Axel, Deepak
Nitrite, and Sudarshan Chemicals. However, the last few years have also seen a
few companies in the space of e-sourcing falling by the wayside-prior to
Freemarket's acquisition by Ariba, its biggest competition came from Wipro's
01markets as well as Indiamarkets, entities that have today passed into
oblivion.

The three key factors driving spend management results tomorrow would be
speed, sustainability, and coverage. Speed is critical to get new efforts up and
running quickly to prove results and value. No procurement organization wants to
fall into the ERP trap of "it's critical for the business, but it will
take years and millions of dollars to prove why". To enable speed, Jaju
feels organizations must identify both the right expertise and market
intelligence, to prioritize and implement opportunities, and the right
technologies to make opportunities real. However, Kharbanda adds that speed
alone is not enough: "At the same time the organization looks to identify
quick wins through nimble deployments of new technologies and solutions; it is
also critical to think about sustainability." To enable sustainability,
organizations must identify expertise and software that captures and
institutionalizes processes and knowledge.

Gupta agrees that it is now more than ever that procurement has become a
global initiative that transcends its purchasing roots. Many organizations are
deploying their best and brightest to tackle and embark on the spend management
journey, as is evident from several instances where CFOs, or even CEOs, are
driving the initiatives instead of the CIOs. Enterprises are also beginning to
learn that they must bring a new set of capabilities to the traditional
procurement process to bring information transparency, organizational
transformation, and buy-in across the companies.

Rajneesh De